Class 8
Bankruptcy, Spring, 2009
Trustee as Hypothetical
Lien Creditor
Randal C. Picker
Leffmann Professor of Commercial Law
The Law School
The University of Chicago
773.702.0864/r-picker@uchicago.edu
Copyright © 2005-09 Randal C. Picker. All Rights
552

Postpetition effect of security interest
(a)
Except as provided in subsection (b) of
this section, property acquired by the estate
or by the debtor after the commencement of
the case is not subject to any lien resulting
from any security agreement entered into by
the debtor before the commencement of the
case.
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552 (cont.)

Postpetition effect of security interest (cont.)

(b)(1) Except as provided in sections 363, 506(c), 522, 544,
545, 547, and 548 of this title, if the debtor and an entity
entered into a security agreement before the commencement
of the case and if the security interest created by such security
agreement extends to property of the debtor acquired before
the commencement of the case and to proceeds, product,
offspring, or profits of such property, then such security interest
extends to such proceeds, product, offspring, or profits
acquired by the estate after the commencement of the case to
the extent provided by such security agreement and by
applicable nonbankruptcy law, except to any extent that the
court, after notice and a hearing and based on the equities of
the case, orders otherwise.
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The Unperfected Secured
Creditor

Hypo
Bank
lends debtor $1000 and takes a
security interest in equipment
Bank fails to file a UCC-1 financing
statement for the equipment
Equipment is worth $1000
An unsecured creditor is owed $1000
Who has priority?
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9-317(a)

(a) [Conflicting security interests and
rights of lien creditors.]
A
security interest or agricultural lien is
subordinate to the rights of:

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(1) a person entitled to priority under Section
9-322; and
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9-317(a)

(2) except as otherwise provided in
subsection (e), a person that becomes a lien
creditor before the earlier of the time:
• (A) the security interest or agricultural lien is
perfected; or
• (B) one of the conditions specified in Section 9203(b)(3) is met and a financing statement
covering the collateral is filed.
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9-102(a)(52): “Lien Creditor”

“Lien creditor” means:
 (A)
a creditor that has acquired a lien on the
property involved by attachment, levy, or the like;
 (B) an assignee for benefit of creditors from the
time of assignment;
 (C) a trustee in bankruptcy from the date of the
filing of the petition; or
 (D) a receiver in equity from the time of
appointment.
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9-322(a)(1)

Conflicting perfected security interests and
agricultural liens rank according to priority
in time of filing or perfection
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9-322(a)(1)

Priority dates from the earlier of
the
time a filing covering the collateral is
first made or
the security interest or agricultural lien is
first perfected

if there is no period thereafter when there is
neither filing nor perfection
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9-322(a)(1)

If resolved outside of bankruptcy
Depends
on what happens next
Unsecured creditor could become lien
creditor and take priorty over Bank
Otherwise Bank would have priority
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What Should We Do In
Bankruptcy?

544(a) is the Answer
Creates
a hypothetical deemed status for
the trustee in bankruptcy
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544

Trustee as lien creditor and as successor to
certain creditors and purchasers
(a)
The trustee shall have, as of the
commencement of the case, and without
regard to any knowledge of the trustee or of
any creditor, the rights and powers of, or
may avoid any transfer of property of the
debtor or any obligation incurred by the
debtor that is voidable by--
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544 (cont.)

Trustee as lien creditor and as successor to
certain creditors and purchasers (cont.)
 (a)

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(cont.)
(1) a creditor that extends credit to the debtor at the
time of the commencement of the case, and that
obtains, at such time and with respect to such
credit, a judicial lien on all property on which a
creditor on a simple contract could have obtained
such a judicial lien, whether or not such a creditor
exists;
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544 (cont.)

Trustee as lien creditor and as successor to
certain creditors and purchasers (cont.)
 (a)

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(cont.)
(2) a creditor that extends credit to the debtor at the
time of the commencement of the case, and
obtains, at such time and with respect to such
credit, an execution against the debtor that is
returned unsatisfied at such time, whether or not
such a creditor exists; or
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544 (cont.)

Trustee as lien creditor and as successor to
certain creditors and purchasers (cont.)
 (a)

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(cont.)
(3) a bona fide purchaser of real property, other
than fixtures, from the debtor, against whom
applicable law permits such transfer to be perfected,
that obtains the status of a bona fide purchaser and
has perfected such transfer at the time of the
commencement of the case, whether or not such a
purchaser exists.
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550

Liability of transferee of avoided transfer
 (a)
Except as otherwise provided in this section, to
the extent that a transfer is avoided under section
544, 545, 547, 548, 549, 553(b), or 724(a) of this
title, the trustee may recover, for the benefit of the
estate, the property transferred, or, if the court so
orders, the value of such property, from 

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(1) the initial transferee of such transfer or the entity
for whose benefit such transfer was made; or
(2) any immediate or mediate transferee of such
initial transferee.
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550 (cont.)

Liability of transferee of avoided transfer (cont.)
 (b)
The trustee may not recover under section
(a)(2) of this section from 

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(1) a transferee that takes for value, including
satisfaction or securing of a present or antecedent
debt, in good faith, and without knowledge of the
voidability of the transfer avoided; or
(2) any immediate or mediate good faith transferee
of such transferee.
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550 (cont.)

Liability of transferee of avoided transfer (cont.)

(c) If a transfer made between 90 days and one
year before the filing of the petition—


(1) is avoided under section 547(b) of this title; and
(2) was made for the benefit of a creditor that at the
time of such transfer was an insider;
the trustee may not recover under subsection (a)
from a transferee that is not an insider.
 (d) The trustee is entitled to only a single
satisfaction under subsection (a) of this section.
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551

Automatic preservation of avoided transfer
Any
transfer avoided under section 522,
544, 545, 547, 548, 549, or 724(a) of this
title, or any lien void under section 506(d) of
this title, is preserved for the benefit of the
estate but only with respect to property of
the estate.
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Later Senior Liens

Hypo
2/1:
Bank enters into possible financing deal
with debtor and files financing statement for
equipment and lends $5,000
3/1: Finco lends $10,000 to debtor and take
security interest in equipment and files
UCC-1
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Later Senior Liens
3/2:
Bank takes security interest in
equipment
Who has priority?
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Later Senior Liens

Answer
Under
9-322, first to file wins, so Bank has
priority over Finco
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Avoiding A Senior Lien

Same Hypo But
Add
$10,000 in USC
Have the debtor file for bankruptcy on 4/1
Assume equipment is worth $5,000

What We Need to Know
3/2
security grant will be avoidable as
preference under Section 547
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Avoiding A Senior Lien

What happens when we avoid the senior
lien?
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551’s Preservation of the
Lien

The Language Again
Any
transfer avoided under section … 544
… is preserved for the benefit of the estate
but only with respect to property of the
estate.
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Avoiding a Junior Lien

Hypo
2/1:
Bank lends $10,000 to debtor, secured
by equipment and files a UCC-1
3/1: Finco lends $10,000 to debtor and take
security interest in equipment and but fails
to file UCC-1
4/1: Debtor files for bankruptcy; unsecured
creditors of $10,000 and equipment worth
$10,000
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Avoiding a Junior Lien


What happens?
Is this Kors?
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Kors

Core Facts
Kors
is the avoidable junior lien hypo + a
subordination agreement
Howard Bank should be senior (filed
7/13/78) but made a mistake in its financing
statement and is unperfected
SBIC should be junior (filed 7/19/78) but
has perfected security interest
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Different Sub Language

Payment Subordination
“We
SBIC agree that we will pay over to you
Howard Bank any funds that we receive
from the debtor until you Howard Bank has
been paid in full.”

What would that mean? How does that
differ from the actual language?
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Subordination Agreement

The Language
SBIC
agreed to be “subject and subordinate
to the effect given to any prior security
interests therein required to be given to
Howard Bank”


What does this mean?
Should we treat this as the avoidable senior
lien case?
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Fraudulent Transfer

Hypo
D
has $10,000 in USC claims
D sells asset to T for $5,000 but asset is
actually worth $10,000
D is insolvent at time of transfer
Sometime later, D files for bankruptcy with
$1,000 in assets
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Fraudulent Transfer
At
the time of the filing, D has $10,000 in
USC claims
$1,000 are claims that arose prior to the sale
to T
 $9,000 arose after the sale


What happens?
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Applicable Non-Bankruptcy
Law

Uniform Fraudulent Transfer Act
D’s
sale to T will be fraudulent transfer as
against creditors in existence at time of sale
Those creditors could ignore the transfer
and follow the asset into T’s hands
Meaning?

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Those creditors could recover the $1,000
that they are owed from T
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In Bankruptcy?

544(a) Irrelevant
Deemed
status would treat trustee as
creditor arising after the transfer
Under applicable law, post-transfer creditors
can’t complain

544(b) Applies!
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544(b)

Trustee as lien creditor and as successor to
certain creditors and purchasers
 (b)(1)
Except as provided in paragraph (2), the
trustee may avoid any transfer of an interest of the
debtor in property or any obligation incurred by the
debtor that is voidable under applicable law by a
creditor holding an unsecured claim that is
allowable under section 502 of this title or that is
not allowable only under section 502(e) of this title.
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544(b) (cont.)

Trustee as lien creditor and as successor to
certain creditors and purchasers (cont.)
 (b)(2)
Paragraph (1) shall not apply to a transfer of
a charitable contribution (as that term is defined in
section 548(d)(3)) that is not covered under
section 548(a)(1)(B), by reason of section
548(a)(2). Any claim by any person to recover a
transferred contribution described in the preceding
sentence under Federal or State law in a Federal
or State court shall be preempted by the
commencement of the case.
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What Happens?

Two Issues to Focus On
Extent

of the Avoidance
How much can be recovered from T?
Beneficiaries

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Who benefits from the avoidance?
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544(b) Legislative History

Senate Report 95-589
“Subsection
(b) … gives the trustee the
rights of actual unsecured creditors under
applicable law to avoid transfers. It follows
Moore v. Bay …”
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Possible Results

1. Trustee As Agent for Pre-Transfer
Creditors
Trustee
limited to extent of pre-transfer
claims and those creditors are the
beneficiary

2. Ditch Beneficiaries Limit
Trustee
can avoid to extent of pre-transfer
claims and all creditors benefit
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Possible Results

3. Ditch Extent Limit and Beneficiaries Limit
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Trustee As Agent for PreTransfer Creditors

Analysis
Creditors
owed $1,000 and could recover
that from T
Trustee does so under 544(b) and gives the
money to these creditors
Post-transfer creditors get the debtor’s
$1,000 in assets
T ends up $4,000 to the good
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Trustee As Agent for PreTransfer Creditors

Not understood to be the result of Moore v
Bay
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Ditch Beneficiaries Limit

Analysis
Creditors
owed $1,000 and could recover
that from T
Trustee does so under 544(b) and shares
that money will all creditors
That gives $2,000 in assets against $10,000
in claims
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Ditch Beneficiaries Limit
Pre-transfer
creditors get $200 on their
$1,000
Post-transfer creditors get $1800 on their
$9,000 in claims
T ends up $4,000 to the good

Not understood to be the result of Moore v
Bay
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Ditch Both Limits

Analysis
Creditors
owed $1,000 and could recover
that from T
Trustee avoids the transfer under Section
544(b) and gets back ???

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Fraudulent transfer law typically gives good
faith transferee lien on asset to extent of
value given
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Ditch Both Limits
Think
of trustee as recovering excess value
from T: $5,000
That gives $6,000 in assets against $10,000
in claims and all paid 60 cents on the dollar
Pre-transfer creditors get $600, posttransfer creditors get $5400

This is understood to be the result of Moore
v Bay
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Ozark

Three Causes of Action by the Trustee
The
alter ego action
Action to recover unpaid debt (Sec. 541)
A preference action (Sec. 547)

What is the basis for allowing the trustee to
bring the alter ego action?
541?
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544?
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544

Trustee as lien creditor and as successor to
certain creditors and purchasers
(a)
The trustee shall have, as of the
commencement of the case, and without
regard to any knowledge of the trustee or of
any creditor, the rights and powers of, or
may avoid any transfer of property of the
debtor or any obligation incurred by the
debtor that is voidable by--
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544 (cont.)

Trustee as lien creditor and as successor to
certain creditors and purchasers (cont.)
 (a)

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(cont.)
(1) a creditor that extends credit to the debtor at the
time of the commencement of the case, and that
obtains, at such time and with respect to such
credit, a judicial lien on all property on which a
creditor on a simple contract could have obtained
such a judicial lien, whether or not such a creditor
exists;
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And Contrast This with
Proposed 544(c)

Organized around
“The
trustee may enforce any cause of
action that a creditor …”
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